This is another excellent Martin Wolf column, read the whole thing. Here is one excerpt:
Before now, I had never really understood how the 1930s could happen. Now I do. All one needs are fragile economies, a rigid monetary regime, intense debate over what must be done, widespread belief that suffering is good, myopic politicians, an inability to co-operate and failure to stay ahead of events. Perhaps the panic will vanish. But investors who are buying bonds at current rates are indicating a deep aversion to the downside risks. Policy makers must eliminate this panic, not stoke it.
I believe people should take more seriously the notion that the ECB will remain hopeless, and that the crisis can only be addressed by some kind of joint US-German-UK-toss-in-the-other-sound-countries radical multilateral move. Which is not to say I am predicting that. But at least in principle, those three countries can get something done and they also have stronger common interests than those across the eurozone, sorry to say.
Just to make the comparison biting, what if we postponed the costly benefits part of ACA for a year (it may be struck down anyway) and send $200 billion directly to Spain and its banks? Is more money needed? Use this as an excuse to get rid of farm subsidies and cut defense spending. Surely the Germans would then chip in too, and perhaps even the Chinese, if we made the donors club sound exclusive and toney enough. Drop hints about various silly islands (not Taiwan).
Have the new QEwhatever driven by purchases of Spanish mortgages. If they keep the money abroad, we lose only the cost of the paper or the electronic bookkeeping entries. If they buy American goods and services with it, consider it QEwhatever as applied to American exports rather than mortgage paper. No liquidity trap there, and the Fed doesn’t itself have to choose which exports to buy. Combine with the Fed’s FX swap facility in some kind of nefarious way, and we can invent four or five new acronyms. And so on. We would still have a long, grinding worldwide recession but perhaps much less of an AD collapse with it.
I understand that Obama may not be the binding constraint here, but is he even thinking about pulling this off? Is he sitting around wishing for it? Is anyone talking to him about these options?
Thinking about this is pointless, politically speaking, because it is a non-starter times infinity.
Why choose the benefits of ACA as the first cost to be saved? There are other low-hanging fruit. As you say, farm subsidies would be a good place to start, as would subsidies to the coal and oil industries.
How would you sell the idea to xenophobic, jingoistic voters? Most of them have never been outside the USA, and have no understanding that Europe’s problems will hurt American voters. It is hard to convince people that doing nothing also has a cost.
“Why choose the benefits of ACA as the first cost to be saved?”
A couple good reasons, because you don’t start a new cash transfer in a depression caused by governments failing to do actual high (relative to other government) ROI public goods investments, and because of the principle of last-in first out.
Wouldn’t that just raise the prices of food and gas during the long, grinding recession. Doesn’t sound helpful to me.
Farm policies actually raise the price of food
“How would you sell the idea to xenophobic, jingoistic voters? Most of them have never been outside the USA, and have no understanding that Europe’s problems will hurt American voters.” – why is it that whenever a solution that doesn’t involve huge government levers moved at slow government speeds is developed to a major worldwide problem, people like you resort to insults? Do you really think the American Public School system is so bad that the graduates of that educational system are incapable of remembering how easily Europe’s problems can cross the Atlantic?
“Farm policies actually raise the price of food” – but cutting them out this year doesn’t provide much funding when the previous bailouts heave been measured at trillions of dollars, but does provide fear to farmers big and small that have budgeted for those subsidies. There’s more money available by cutting home ownership subsidies – but that would be even more foolish to cut at this time. Fear leads to panic. Remember the quote above is about eliminating panic – not stoking it.
Insult American public schools as you wish, but once you subtract the urban ghettos our schools aren’t so bad. As an American who spends a good bit of time in Spain and owns property there, I can tell you that a nice quick 200 billion bailout would be disastrous. The middle class there is still convinced that a government is supposed to provide benefits far in excess of contributions over time. The upper class and political class, overlapping in part, believe a government which cannot provide opportunities for lucrative bribery is not a government worth having. I’m impressed by the extent to which economists view money as a plaything and taxes collected at the point of a gun, or debt stamped with our names, as a light issue. European problems can spill over to North America? They started here. Without a Roaring Twenties we wouldn’t have had the Thirties. We did it again. Bernanke was sold as an expert on the Great Depression, yet allowed a Roaring Twenties to recur. Now that’s genius.
A devalued currency raises the price of everything that is priced in it. Any form of QE (money printing) attempted will once again raise the prices of all commodities and equities. Inflation is the only way out for the Fed and the Treasury.
“How would you sell the idea to xenophobic, jingoistic voters?” There are other reasons than these that voters may oppose such a plan. They may believe that it wouldn’t work. They may believe it would help Spain but hurt America more than the alternative eurocollapse would (selfishness, not xenophobia). They may think it rewards irresponsibility, creating a precedent that is more damaging than the benefit of helping now.
Most people don’t have the tools to judge the plan itself or even differentiate between good and bad economists. Ultimately, they would be asked to accept the proposal solely on the authority of the economists who proposed it.are they dumb not to do so?
Don’t you remember when Europe sent over $200 billion dollars to bail out our banks when the crisis started?
LOL.
Yeah. Dumb ass Americans. It’s like they think their money belongs to them or something. There couldn’t be a clearer contrast with refined, civilized Europe, whose fiscal and monetary policy is exercised ever so prudently for the global good.
Seriously, where do people get this stuff? Europe remains deeply divided by nationality despite the tribes having lived cheek-by-jowl for a thousand years. Every few decades, they decide to try and kill each other. They’ve been living beyond their means and it will happen again now that the funny-money is running out.
Once again, A-G confidently predicting stuff that won’t happen. Paging Dr. Dunning and Dr. Kruger.
Are you confident in predicting there will never be another war between the European powers?
@ Alan:
It doesn’t matter what the voters want, helping Europe helps Obama which means there’s no way the Reps go along with it which means it doesn’t happen. Maybe after November if there’s a President Romney.
Farm subsidies doesn’t involve as many dollars. It is a low hanging fruit, but a (relatively) small one.
“I’m going to assume that the ECB is bound politically. But I am going to assume that Obama/Bernanke are not, because that totally makes sense, especially in an election year. I’m going to suggest that Germany would like to be involved – even though if something like this was politically feasible in Germany, the simple course of action would be for the Germans to tell the ECB to do it. I’m going to equate my desired action to QE, which comes from the Fed and involves newly created money. But then I’m going to imply this is something Obama should do. I’m going to suggest that he pay for it by convincing Congress to do things I would like them to do anyhow, but that Congress clearly would rather not do. This is definitely not a waste of time to think about.”
Too bad it’s too long for a Tylertweet.
Eric:
FAIL. Tylertweets were funny because people played on his style of writing. You failed to do so in your comment. You also mischaracterized many of his points in this post, which I suppose qualifies for a DOUBLE FAIL.
Ireland’s Endorsement of Austerity and Other Reasons for Euro Optimism
http://www.piie.com/realtime/?p=2915#.T84pWoB-wjA.twitter
Please tell me this is some sort of satire.
We start with the idea that we are about to see a rerun of the GREAT DEPRESSION unless something is done, and then we are offered some completely impossible quasi-solution whereby Spanish banks receive Affordable Care Act funds rather than low and middle income Americans. This is supposed to make sense because the ACA might be found unconstitutional. What?
No. No one is talking to Obama about “possible” scenarios such as these.
No one is even talking to Obama about the very solution that Wolf offers, namely massive infrastructure spending and other government expenditures funded via debt, monetized if need be. Nor is anyone talking to EU leaders, who have a much more convoluted road to travel if they are to accomplish the same thing.
We are well and truly screwed.
namely massive infrastructure spending and other government expenditures funded via debt, monetized if need be.
The Fed already bought 60% of US debt last year. Cut out the middleman and just print the money.
That government can do what no business, household or individual could is modern economics’ most pernicious idea.
Yes, this is one reason I’m coming around to Scott Sumner’s view. If we’re going to print money, let’s at least not shove it all through the famously inefficient keyhole of gov’t spending.
Is US federal government spending famously inefficient? Is it actually inefficient?
Most outlays are to social security, Medicare/Medicaid, or the military. Explain your belief for the relative inefficiency of any of the above, compared to their private sector competition:
Social Security versus Life and Annuity
Medicare/Medicaid versus private Insurers
Military vs ???
I’d like to hear what definition of inefficiency you have, given that s.s. has basically no administration cost/overhead, and private medical insurance not only has greater overhead but negotiates and pays far higher prices for the same services…
Well, that’s trivially easy — taking money from the productive and giving it to the nonproductive is always economically inefficient, so increasing that probably won’t help grow the economy in the long run, though it may be desirable for other reasons.
The gov’t doesn’t allow the private sector to have a military, or deliver first-class mail (which is why you get a ton of junk mail even as the Post Office mismanages their monopoly into billions in losses, unlike FedEx and UPS). Also, the SS/Medi overhead thing is a myth, the IRS is the bill collection branch of both and I don’t think we can take seriously the notion that gov’t workers are more cost effective than their private sector equivalent; the public sector unions exist largely to make sure that doesn’t happen.
The key here is the massiveness, not the mechanism. Many have proposed simply cutting all Federal taxation to zero and having the Fed “print” the necessarily huge government shortfall out of existence. Perhaps we could even do the same for the states’ budgets, just figure out a way to buy all muni bonds and let it be known that the Fed will keep doing so no matter how many are offered up to a certain percent of each state’s total economy.
It really doesn’t matter what we do as long as it is absolutely massive. As is banks the world over cannot function since they are “owed” by the public monies that the public simply does not have. They also managed to make sure that any single default by anyone leads to a domino effect of systemic failure(s). Further, the public becoming highly over-leveraged lead to a massive fall in business investment since there are ever fewer and ever poorer customers available to sell to. Now we are left with approximately 18 million fewer jobs than would exist if America had returned to historic trends of economic growth since the recession started and subsequently “ended”.
It didn’t really end becasue here it is again; It’s a disaster.
That would be one option, but it isn’t really necessary, the Fed can still buy another 50% of outstanding U.S. debt. And we need both the federal government and the states to run fiscal surpluses; if they just spend all the monetary stimulus then all we’ve done is move lots of spending into the public sector which will further reduce growth.
Probably all the Fed really has to do is publically announce NGDP targeting, inflation is all about expectations.
Tyler makes depression sound good, at least better than this alternative.
This is the kind of idea that Wolf is referring to as widespread belief that suffering is good. Giving people free money is better than double digit unemployment. You’ll be better off even if you don’t get anything directly or understand how. You are far more dependent on general economic conditions that you realize.
In turns out that most people are Austrians without realizing it. So they think a price must be paid. But the modern economy has never seen the kind of misallocation of investment dollars that would necessitate the massive unemployment seen during your typical depression. And despite the real problems with our economic system, this time is no different. There is no plausible story you could tell about malinvestment that would explain the last 4 years. The underlying defense is, “there must be some story even if I don’t know what it is because my theory demands it”, which is a pretty terrible defense. Austrianism is simply badly mistaken about the impact of the pricing of money on economic efficiency. End of story.
There’s no such thing as “free” money. Why do you think the government outlaws counterfeiting?
“widespread belief that suffering is good”
Don’t forget this one, our supposedly thoughtful intellectuals engaging in sheer panic and non-stop strawman non sequiturs.
If it were truly a serious life-or-death matter all of the economists and pundits would have come up with a plan to shrink banks down to manageable sizes where they could naturally die off and imposed that rule. There would have been the equivalent of Einstein’s letter to FDR about the nuclear bomb.
Also, suffering is not good. But neither is surgery, yet we still have surgeries sometimes. Usually when someone put off the hard choices when times were better and now require emergency care.
“widespread belief that suffering is good”
Is this any different than saying that we should give any insolvent firm free money, because bankruptcy is suffering and suffering is not good?
Suffering is the price that must be paid for past errors. I think the widespread belief is that suffering can be avoided by economic magic tricks.
So Americans voters would be asked to pony up $200 billion to give to Spain only three years after the huge political winner of TARP? Why not discuss more realistic ideas such as abolishing the senate or instituting public sacrifices to Xipe Totec in the capital rotunda?
Ritual sacrifice of economists would be a public good.
@TylerTweet Abolishing Senate one possible scenario to avoid another GD?
@TylerTweet Human sacrifice in Capitol Rotunda – better Xipe Totec or Ben Bernanke?
@TylerTweet US gives Spain $200B in exchange for lifetime of tapas and all its beautiful women
“@TylerTweet US gives Spain $200B in exchange for lifetime of tapas and all its beautiful women”
Providing those beautiful Spanish women stay out of the places with the best tapas.
LOL.
There are days think Tyler is from Earth and then there’s today.
@TylerTweet Could Instapundit and MR join forces to colonize Mars? Anything is possible
Come on people, I already said it won’t happen…
One-dimensional thinking.
The fact that specific ideas sound so bizarre says everything. They have nothing. Keynesianism (as currently bastardized) seems like the marketing illusion that claims “we have something, except the meanies won’t let us do it” as if any government (I lost count of Bush stimulus checks) would turn their noses up at an ideology that justifies their interventions. But hey, maybe megalomaniacs are just lazier than I think they are.
I have long been trying to understand a Germany voter’s state of mind on the issue of bailing out Greece.
Thanks to the comments to this post, I now understand what they’re thinking perfectly…
Your comment is over my head, but I always wonder why people have to get much past “noone likes to give their money to other people.” I don’t even enjoy paying for gas, and I’m reasonably certain I get gas in return.
“I don’t even enjoy paying for gas…”
Does anybody enjoy paying for anything? Hell, I want everything for free. But if you want something, you gotta pay for it. Except for tax cuts of course – they pay for themselves…
For some strange reason I enjoy paying for tires: It makes me feel like an adult
Replace the Euro with the dollar whole hog and now we’re talkin’.
Interesting idea, but since Spanish banks need Euros and the ECB can create any number of them at low cost, I don’t see the need for the US to get involved. True, it might be a good excuse for the Fed to do some QE that it ought to be doing anyway, but it seems like a sort of ham-handed way to do monetary policy. Of course compared to the way the Fed is actually doing monetary policy, ham-handed would be a big improvement.
@TylerTweet US Mint presses faster than ECB presses? Time will tell. Also, send tapas.
@TylerTweet and beautiful women.
@TylerTweet Paul Krugman’s alien has come down to earth to explain how bailing out Spain for $250B from the US, Germany, and China saves the world for GD part two. Then the alien explains how the US should double its borrow at 2% and sells his great new ‘out-of-this-world’ diet program to lose 10 pounds in thirty days!
@TylerTweet But will Spain uphold their agreement to redesign the spoon, and will restaurants with more attractive spoons serve less pleasant food? Hint: this is how to lose weight.
Don’t send that tweet to Bloomberg.
@TylerTweet: Use this diet spoon to lose weight. There is more here. I thank the Greek electorate, circa 1827-2009.
http://themetapicture.com/diet-spoon/
It is not Obama who would have to think of this, it is the Republicans. Obama would be absolutely decimated politically for even insinuating we send US funds abroad, not matter how logical. If the R’s proposed it first it could maybe have a chance of happening, but I doubt it. This would introduce the risk of having the appearance of the administration and Congress cooperating on something and that is not a risk Republicans are willing to take. Emboldened by their success in Wisconsin last night, watch out.
I’m sorry, I’m still not operating under the assumption that sending $200B in taxpayer money to Spain is “logical.”
Nothing is more sinister than Republicans refusing to propose an idea that would go against their own core principles! Not only that, they won an election recently, so they might not just roll over and accept their opponents’ ideas in the name of doing “something.” I can’t believe the horrific state of politics!
I know, it’s just like the debt limit crisis when the Republicans insisted that we had to default rather than agree with Democrats, who of course had no responsibility to agree with Republicans (who were so sneaky they kept insisting that Treasury keep making debt payments from the (much larger) revenue stream even if the debt limit wasn’t raised, as though they could dodge the blame that way! shameless!).
You should include the title of any FT.com articles, then you can search for it and bypass the paywall
“Panic has become all too rational”
The thing about the Great Depression: as long as someone had a job they were doing fine. Solutions therefore can concentrate on those who don’t.
To this crowd, if you don’t have a job you’re a worthless loser.
Sorry, they call those folks ‘ZMP’
Not so. I’m a non-American politlcal/economic moderate. What gets my goat are my deadbeat Scandinavian relatives who don’t bother looking for a job. Yes, they are indeed worthless losers.
Politically speaking, you could never do QE and buy Spanish mortgages, but you might be able to do QE -> IMF -> Spanish mortgages. I would be critical, though, that this NOT be tied to any US budget cuts; there would be no support for cutting benefits to US voters in order to bail out Spain.
It occurs to me, though, is that what we really need is a Greek exit from the Euro ASAP (six months ago would have been better). We need it as as test to demonstrate to voters in both the US and EU just how messy a problem it would be (a test run on the small scale of Greece rather than the large scale of Spain). People simply aren’t going to believe disaster scenarios (and vote accordingly) so long as those scenarios remain purely hypothetical.
Remember the Wizard of Oz, when the screen hiding the human Oz actor was revealed, and the Great Oz said:
“Pay no attention to the man behind the screen.”
Well, in a way, what Tyler is talking about is the IMF: that if the ECB fails to act, or acts less forcefully than needed, the Wizard of the IMF will intercede, along with US contributions.
The US will be asked to fund more in that event, and would be funding the EU bailout.
But, in the meantime, Pay No Attention to the Man Behind the Screen.
Wolf is out to lunch. Politicians, international financiers and bankers and their economist monetary priesthood foul up the lives of innocent proles and he wants to push a reset button and start in on the process all over again. That ain’t the answer to whatever the question is. The system that led to this situation has to be allowed to fail, and everyone, through personal loss, must come to realize that the fiat money machinations of the nation/state are a disaster that must come to an end, Just as a toddler must learn not to touch the hot stove, adults must learn that trusting strangers, even elected ones. with their wealth can be painful.
Could anyone convince me using simple words, I’m none to bright, how this isn’t just a massive game of hot potato. We are not as rich as we thought we were, but we spent or promised away the presumed wealth already. So now its just a game of who gets stuck with the bill. Which Peter gets robbed to keep 50.1% of Paul’s out of destitution? Or how much socialization of the pain is politically possible. Inserting the US taxpayer who still has to pay for SS, Medicare and public employee pensions in paying for European problems which are worse seems really dumb.
Unless you are moron, I doubt you can be convinced of what you asked to be convinced of.
Yancy,
Since you started the name calling, I will respond by calling you both a jackass and a moron. I thought Mark’s question was one of the best. Since you are a self selected smart guy, why don’t you just answer his question? The reason of course is you cannot, because you are most likely not educated enough. Mark is exactly right—the question is “who pays?”. Tyler proposes, for some odd reason, that the Fed print some money and “buy Spanish Mortgages” so they in turn can buy US products—or worst case we have liquified the local Spanish economy. What is that supposed to do? Presumably “jump start” their economy. Why would that work? If the mortgages are so good why can’t the Spanish banks earn the interest and invest back in their own economy. If they are not good, don’t we have to pay the cost of the $200 billion in some way? We have just taken $200 billion out of our economy and give it to a government (via their banks) who just spent 5 years losing 100s of billions trying to lead the world in alternative energy production. Why do people like Tyler think that all Macro units of spending are created equally? Why $200 billion? Why not $1 trillion? We tried that here and have the worst post recession growth in history. I know, it would have been worse had we had not done it—-so lets just keep doing it. By the way—-have you seen any of that money? I know I have not.
I think Yancey’s point was that only a moron could be convinced that this game of monetary-musical-chairs is in any way a solution.
The proposal, as I understand, it is to re-capitalizing the Spanish banks (and I assume those of other struggling states) and provide funding the to counties themselves. It’s not clear if this is done with grants, loans, transfer of toxic assets, etc. but let’s assume the donor countries are the most generous and simply gift the money to the ailing institutions.
How does this prevent a depression? Nothing has changed with the fundamentals that caused the problem in the first place. Don’t the countries continue to spend without constraint? Don’t they blow through the gift in a few years (maybe even 10 years) and then end up in the exactly the same place?
I’m not trying to be dense or obnoxious, I honestly don’t understand how this transfer would prevent a depression. It seems the only thing that will work is getting sovereign debt under control. What am I missing?
Spain wasn’t running a large deficit until the recession hit. They had a lower total debt/GDP ratio than Germany. Now they have sky high unemployment which makes it very difficult to raise tax revenue. In fact, it is impossible for them to fix their sovereign debt problem because cutting spending will make their economy worse and lead to an even larger budget deficit. That is what has been happening over the past 4 years, so it’s not just a hypothetical. They can make their deficit go to zero by cutting government spending 100%, but that would still leave their debt. Provide enough stimulus to their economy and they can get unemployment down from the sky high levels it is currently at, pay off some of their debt and they could run a budget surplus.
The current state of 24% unemployment (51% for under 25) is the fundamental that needs to be changed and can be through economic stimulus. Greece was irresponsible and there is no way to fix their problems since their economy has always been unsustainable. But Spain’s economy and government policy is perfectly sustainable for very reachable unemployment levels.
Spain’s unemployment rate has averaged 16% the past 25 years. They rode the coattails of the Euro for low rates that fed a housing and consumer debt bubble that made tax revenues unsustainably high.
http://www.tradingeconomics.com/spain/unemployment-rate
RG,
The only way you get to your 16% average is by INCLUDING the last four years. If you look at the same dataset for a time period prior to this recession, they had been average a rate at or below 10%.
>Spain wasn’t running a large deficit until the recession hit.
Amazing isn’t it. There was all this economic growth generating government revenues that suddenly disappeared. And now we find out that much of what was borrowed/lent can’t be paid back.
Their spending is sustainable only with bubble economic activity.
All one needs are fragile economies, a rigid monetary regime, intense debate over what must be done, widespread belief that suffering is good, myopic politicians, an inability to co-operate and failure to stay ahead of events.
Plus massive gov’t intervention in the labor and capital markets. That was the major difference between the previous several recessions and TGD. People forget how crazy the situation was, at one point FDR was raising the price of gold by 21 cents because 21 is 3 times 7 and 7 is lucky, there were massive general strikes like nothing seen since 1950, wage controls, price controls, etc. There was certainly also very bad trade and monetary policy, but we’d had that before.
Is Obama even sitting down and considering sabotaging the roll out of his signature piece of legislation in order to send big checks to Spanish bankers? Are the pinheads on his re-election campaign bothering to lobby him for this, this clear path away from Another Great Depression and towards international harmony, peace and prosperity for all?
“widespread belief that suffering is good”
it is when it’s necessary.
ps the gods of the copybook headings wept.
The Euro is unworkable. Always has been, always will be. The sooner this is recognized, the better. There is no nice way to get out of it, but it will end, one way or another.
The U.S. should stand back and hope the fallout isn’t too bad. Some market monetarism would help.
In my opinion, there is a choice between two options. Some people/banks
have made bad investment choices in the past, but we don’t want them to
bear all the losses, since it would bankcrupt them and probably the whole
system. So all solutions to the crisis basically come down to two choices:
(i) We can do nothing and let the banks, southern europe, etc. collapse.
This probably means that people who made the mistakes that lead to this
crisis will bear the majority of the costs (mostly bankers, holders of
bonds (from banks and some governments), etc). However, we assume that
this will cause major disruptions to the economy and will therefore also
lead to suffering of “innocent” people due to high unemployment, lost
deposits, etc. So everybody will suffer, but those that are responsible
will probably suffer more.
(ii) The second option is to share the pain via higher inflation or
taxpayer’s money. This means that there won’t be any major economic
crisis, so that the total losses are probably much smaller than in case
(i). However, those that are responsible for the crisis are will only bear
a small fraction of the loss. So everybody is probably better off as in
(i). Everyone will slightly suffer, but those that are responsible will
not suffer more than everyone else. This solution is at least morally
questionable, since we directly force people to bare losses for which they
are not responsible (taxpayers, all bond holders via inflation,…). In
addition, there are legal problems with some of the solutions in this
category.
What we are trying a the moment is to prevent the disruption of the
economy without sharing the losses. This has already been started via the
various european bailout packages. The problem is that will end either in
(i) or (ii) (if real money starts flowing from the guarantees), eventhough
the politicians promised us the best from (i) or (ii). I think your
proposal is more honest, since it clearly falls in category (ii). However,
as one can see in the comments, people (including me) hate the idea of forcing innocent people
to share the pain.
Andreas
“Share the pain”
Did the CEO of Citibank share any pain whatsover?
Did any bondholder anywhere feel any pain whatsover?
Fannie and Freddie are still going concerns and FHA is handing out 4% down payment home mortgages.
This is the problem. No one except the taxpayer felt any pain.
You want more from taxpayers?
We need something back. Like splitting up all the mega banks, and find a way to have their top executives on the street selling apples.
Just to make the comparison biting, what if we postponed the costly benefits part of ACA for a year (it may be struck down anyway) and send $200 billion directly to Spain and its banks?
I’m not sure what this is supposed to accomplish that couldn’t be done by printing euros instead, which seems to make more sense since the euro is actually their currency. $200B to save the Germans from some inflation?
Tyler has admitted he is way out there, and many of the critical comments are valid, particularly about details. But he does have a point. As mpowell notes Spain’s fundamentals are not really all that bad, certainly nothing like Greece’s, who will probaby have to Grexit the euro sooner or later. Organizing a serious bailout for the Spanish banks is not all that unreasonable, and to the extent a broader coordination involving the US, UK, and others might help, is not so ridiculous. Perry Mehrling argues that global monetary policy is now run by the “C5,” the five most important central banks, which do not include the Chinese. They are the US Fed, the ECB, the Bank of England, the Bank of Japan (presumably the funny islands Tyler was referring to), and the Swiss central bank.
While global coordination, perhaps with an assist from the IMF, might help, really this could be done more easily with some separate items. Germany really can cave and let the ECB save the Spanish banks, and Tyler was clearly referring to Merkel and the Germans when he said that Obama is not the constraint on something like this. As for the US, more along the lines of Martin Wolf, the obvious thing to do would be to restart the assistance to state and local governments part of the old Obama stim, although that will not get through a Congress hungry to see the economy turn down in the near turn so as to defeat Obama. The main drag on employment in the US economy for well over a year has been state and local government layoffs.
BTW, to those going on about “printing money,” or falling into fantasies about how this is all about “fiat money,” nearly all of the QEs have not led to noticeable increases in money supply. Reserves have gone up, but not any measure of the money supply. This is the sign of how badly damaged the financial system and broader economy is.
Excellent comment. Sadly, in another few years we’ll not be able to say that the economic fundamentals of Spain (or Italy, or the UK, or Brazil, etc.) are good or strong or even workable at some lower baseline. I fear that this is exactly where we’re all headed.
In what way are Spain’s fundamentals sound? CA deficit, huge budget deficit, letting in millions of low-educated workers for a now-defunct construction sector, regional deficits etc pp.
Thank you Barkley, I think the idea is really a non-starter politically, BUT it’s been impressively lame how deeply wedded to their positions most of the comments have been, given the stakes. It’s times like this that require some creative thinking, but the anti-heresy (to whatever beliefs one is wedded too) inertia is evidently formidable.
restart the assistance to state and local governments part of the old Obama stim, although that will not get through a Congress hungry to see the economy turn down in the near turn so as to defeat Obama.
Ah yes, the infantile DeKrugman logic that assumes Republicans actually believe the opposite of what they claim and only oppose gov’t expansion because they hate Democrats so much they want to wreck the economy rather than because they think DeKrugman’s theories are wrong. It’s pretty sad this kind of petty nonsense represents the forefront of economic thought on the left.
TD,
You are full of partisan rhetoric and name-calling, but would you like to back this up with some facts, please? During every past recession, 2001, 1990, 1982, and going on back, with many of those having Repubs in office, spending and hiring by state and local governments rose and were not a drag on the broader recovery. That is not going on this time.
And as for the Repubs wanting a return to a recession in the US in the near term so they can defeat Obama, everybody knows this, not just Kruggie. Aren’t you just hoping and praying for it, TD? it is the only way Romney will win, and you have shown yourself already to be the most persistently mindless partisan hack on this site.
You are full of partisan rhetoric and name-calling… you have shown yourself already to be the most persistently mindless partisan hack on this site.
LMAO, incoherent much? And this from the guy who started the thread with the claim that the GOP wants to wreck the economy. Still upset I completely destroyed your claim the GOP was responsible for the risk of default, I guess.
During every past recession, we weren’t carrying trillion-dollar deficits. I mean, come on, that’s the best you’ve got? Really?
TD,
I am going to quickly cede the ground to you as arguing with you is an utter waste of time. However, nothing in your last comment is remotely correct.
I did not start my comment with GOP wants to wreck the economy in the short run, but all the evidence is there, and Sen. McConnell made it quite clear some time ago that his top priority was defeating Obama, not saving the economy.
You most certainly did not “completely destroy” my argument that Repubs in the House were responsible for increasing our default risk. If they had just passed an increase in the ceiling as had every previous Congress 79 times before since 1939 without a fuss, there would have been no crisis. Indeed, their messing with this action is precisely a prime piece of evidence in there being outright efforts to wreck the economy, although I am aware that some of these Congresspeople are so out of it, they actually thought this nonsense would help the economy, and the S&P report made this clear, even if somehow you have failed to acknowledge that fact.
As for GOP opposing expanding government, the data suggests otherwise in practice. Government expanded strongly under Reagan (despite all his rhetoric to the contrary) and under W., much less so under either Clinton or Obama, aside from the very front end of his administration.
As for the currently large deficits, in case you had not checked lately, we were running surpluses at the end of the Clinton presidency. Again, in approximate order, the reasons for the currently large deficits are the recession, the Bush tax cuts (added on to by Obama), the Bush wars, and far behind, the now ended Obama stim (except for his tax cuts, still in place to please the GOP in Congress, which is also whining about the cost-restraining measures in his health care plan).
And, again, you have not answered on the matter of state and local spending, which rose during recessions overseen by GOP presidents, but are now being held down by Repubs in Congress refusing to pass Obama’s request to send them aid.
As it is, there is massive hypocrisy in this latter situation, as GOP politicians at state levels are kissing the forefinger of Grover Norquist. So, here in Virginia, where I am, the now GOP-controlled legislature (and governor) passed a budget that included an unfunded mandate for local governments, passing to them a requirement that they pay into teacher pension funds what used to be paid by the state, which did not want to raise taxes at its level (All Praise to the Divine Grover!). As it is, after massive and annual budget cutting, nearly every local unit of government, including the vast majority of those controlled by the GOP have had to raise taxes to cover this unfunded mandate. This is what is going on at the ground level, thanks to the hypocritical policies of those you praise, TD. I hope that you are very proud of them.
I assume you mean it’s a waste of my time.
Repeat after me, BR:
Republicans don’t believe gov’t spending is good for the economy.
Republicans don’t believe gov’t spending is good for the economy.
Republicans don’t believe gov’t spending is good for the economy.
I don’t know why this is so hard to understand. And no, the evidence does not contradict it, in fact virtually every proposed GOP budget for decades has been smaller than the Dem proposal.
It’s just astounding to me that people can assume the GOP is lying about its core values just to hurt Democrats.
You most certainly did not “completely destroy” my argument that Repubs in the House were responsible for increasing our default risk.
Yes, I did, you’re just repeating the arguments I already destroyed, which you would know if you didn’t just run off and ignore anything that challenges your assumptions. The GOP repeatedly insisted that Treasury not default even if the debt limit was not reached. They even drafted legislation to that effect and got the Congressional Research Service to confirm that Treasury could prioritize debt service. The people conflating debt limit with default were Democrats who didn’t want to agree to spending cuts or have the gov’t be limited to spending only existing revenues.
See, for instance, Sen Pat Toomey’s remarks:
But Secretary Geithner knows that congressional delay in raising the debt limit will in no way cause a default on our national debt. If Congress refuses to raise the debt ceiling, the federal government will still have more than enough money to fully service our debt. Next year, about 7 percent of all projected federal government expenditures will go to interest on our debt. Tax revenue is projected to cover at least 70 percent of all government expenditures. So, under any circumstances, there will be plenty of money to pay our creditors. Moreover, as the Congressional Research Service has noted, the Treasury secretary himself has the discretion to decide which bills to pay first in the event that a cash flow shortage occurs. Thus, it is he who would have to consciously, and needlessly, choose to default on our debt if the debt ceiling is not promptly raised upon reaching it. It takes a lot of chutzpah to preemptively blame congressional Republicans for a default only he could cause.
Aside from the hilarious projection and lack of self-awareness in that comment, the funniest part has to be the total lack of recognition that Republicans don’t believe gov’t spending is good for the economy. I can understand playing for Team Blue, not my thing but okay, but it’s like they can’t even conceive of a world where people might disagree with their assumptions.
I shouldn’t, but you just invite it with your nonsense. Sorry, no repeating after you, of all people.
Look, maybe the GOP really does want small government, but somehow whenever they get into power, they deliver precisely the opposite. You say they do not lie, but they do so all the time, with their 180 degree switch on the individual mandate (from “individual responsibility” from the Heritage Foundation to “socialism” now that Obama is for it), the biggest such switch I have seen since the Communist Party of the USA turned on a dime over Hitler after the Molotov-von Ribbentrop Pact.
The big joke is that Romney is running on Reagan: gonna cut those taxes and increase defense spending while balancing the budget, yahoo! And if he wins and gets a GOP Senate, that is what he will do, oh, of course except for the balancing the budget part, which will probably explode even worse than it did under Reagan, although in his case, the Congress will suddenly take to rolling over and raising that debt ceiling without batting an eyelash, all in the name of the national interest after all (and anybody calling them on it will be ever so rudely dismissed, or more likely, just ignored).
Again, you have no idea what you’re talking about, virtually every proposed GOP budget for decades has been smaller than the Dem proposal, not just when lack of spending might hurt a Democratic President.
That they aren’t 100% consistent on every point every year (are the Democrats? come on, do you even read what you type? Obama himself opposed the mandate as a candidate, along with sundry other broken promises such as using public campaign funds) isn’t evidence that their core ideology of less gov’t spending is a sham meant only to hurt Democrat Presidents in election years.
Your fabulist conspiracy theories are amusing, but incredibly delusional.
Barkley likes to suck the ghost of Keynes’ cock.
Uh huh, TD. So, again, Repubs are just deluding themselves with their proclaimed beliefs. Why is it that spending rose so much more rapidly under Reagan and W. than under Clinton or Obama? Sorry, but facts trump propaganda.
Oh, and as for this silly statement by Toomey, sorry, but in fact under the law the Treasury Secretary is required to pay all legitmate bills presented to him that are based on budgets passed by Congress and approved by the president. He does not have this flexibility that Toomey claims and that you apparently believe in. This is just deluded propaganda for ignorant fools..
BR, if you want to be taken even a little seriously, you have to start by at least understanding that the President does not have absolute control over the budget. For instance, Reagan’s proposed budgets included cuts that did not make it through Dem Congresses — and Clinton shut down the gov’t rather than accept GOP Congressional budget cuts. W’s budget rose FAR faster under Dem Congresses. I mean come on, aspire to some tiny shred of intellectual honesty here.
The Congressional Research Service disagrees with you, debt service can in fact be prioritized. So does the GAO.
Or are the CRS and GAO part of the conspiracy too? [cue X-Files music]
Sorry, but Geithner lied to you. Facts trump propaganda, indeed!
TD,
What is it with you guys who provide links that then do not deliver at all what you claim they do?
So, looked at CRS one. On p. 3 it makes clear that in case of failure to raise debt limit Treaury is “caught between two requirements,” one to pay legally obligated bills and the other not to abrogate the debt limit. On p. 7, while some at GAO and OMB and others have argued that in the face of the debt limit Treasury could engage in “prioritization,” there is no legal basis for this whatsoever, and Treasury states that “prioritization” is “unworkable.” Maybe in practice, that is what somebody would do, but it is without any legal foundation, and one strong view is that bills should be paid in order as they come in until the debt limit is hit, after which, nothing gets paid.
Perhaps what you thought was the vaunted flexibility that Treasury has are the mechanisms it does have for staving off the debt limit for a short period of time. It can issue a “debt suspension” notice that allows it to stop contributing to certain funds, mostly retirement ones for federal workers and a few others. This it did on May 16, 2011, when the debt limit was supposed to hit, but that only postponed the day of reckoning beyond which these expedients no longer sufficed to August 2, 2011, which became the date on which the limit needed to be raised, and was at the last minute, after a nice period of collapsing consumer confidence and other elements of the economy watching this ridiculous and unnecessary spectacle.
So, sorry, TD, facts do trump propaganda. A Treasury secretary can postpone a day of reckoning, but has no authority to do anything such as “prioritization” to overcome it when it arrives.
Please keep up your version of adult-level conversation by peppering in as many “DeKrugman”s (whatever that even means) as possible.
It’s not pejorative, it’s just a combination of DeLong and Krugman.
Barkley is right though about your commentary on this blog, Your strongly partisan, and tend towards insulting those with differing points of view. You occasionally have some good insights, but not in proportion to the extent of your commentary.
No one gives two shits about what you think.
I never claimed to be nonpartisan, and I am happy to criticize the Repubs where I feel they are wrong (most social/crime issues). I generally attack arguments, I have never (for instance) called anyone a “mindless partisan hack” or an “ignorant fool” which are generally hallmarks of an inability to grapple with actual arguments.
or just print the effing money and fill the holes.
Yes thanks for reminding me again why it is a very bad idea to put something as important as the monetary system in to a government run monopoly.
Just to make the comparison biting, what if we postponed the costly benefits part of ACA for a year (it may be struck down anyway) and send $200 billion directly to Spain and its banks? Is
Why not simply print $200B and deposit them in Spainish banks as 5 year CD’s asking for interest equal to whatever the current return is on US Treasury bonds?
I’m not getting what it means to ‘save’ in this context when talking about an economy in a depression. Suppose the benefits of the ACA cost $200B, how is that saved? Are individuals not getting health care to the tune of $200B. In that case you’re lowering the income of doctors, hospitals and health care providers by $200B. What problem does that solve? Does it mean that consumers will dip in their pockets and fund $200B of health by other sources? Then you’ve cut that income.
Avoid another great depression?
Tyler, you are late again.
I think a point can be made that suffering is, in fact, good. In moderation. As a corrective. Why else do we get up every morning and go to work, except to avoid suffering? Why else do we do what it takes to pay back our loans, except to avoid suffering? Why else, after losing a job or assets, do we struggle and fight to gain them back, except to avoid suffering?
In the contemporary US suffering is not having cable TV, drinking PBR, shopping at Walmart, not having air conditioning.
But the suffering we are talking about is the fact of not having a job to get up in the morning to go to.
Bond valuations may be high, but so are equity valuations. S&P 500 is trading well above historical P/E ratios, despite record high profits as a percent of GDP (which suggests a pull back on profits as wages’ relative share grows). All those people buying Facebook and Linkedin at 60 times earnings don’t seem too concerned about the downside relative to the upside. For that matter commodities aren’t looking too cheap either by historical standards.
Difference was in 1932 equities were trading far below historical valuations, and commodities (particularly agricultural) were so cheap that farmers were starving. In 2012 there’s most staple foods are hitting record prices, such that it’s setting off riots and revolutions around the world. Pretty much the only asset class that looks “cheap” is real estate, and even that’s tenuous. It’s certainly cheaper than it was in 2007, but it doesn’t seem that cheap looking at Case-Schiller going back to 1970.
Martin Wolf’s thesis is that high bond prices are telling us that investors are panicked and highly risk-averse. But that only works if other risky assets are very cheap. Instead pretty much everything looks expensive given the fundamentals. If investors are that panicky, we should even see a very steep yield curve as the demand for low-risk T-Bills out strips the demand for more volatile long-dated bonds. Yield curve is flat by historic standards.
There’s only two valid explanation in my mind for this phenomenon.
1) The world is awash in a global savings glut. There’s simply not enough investment opportunities to supply anything but very low returns to all the savings in the world.
2) Inflation is here, we just don’t see it in (American) consumer prices yet. There’s no doubt the money supply has exploded since 2008, but the justification for why there’s no inflation is because velocity has fallen commensurately. What if the inflation has been bidding up asset prices instead of consumer goods (and also the price of consumer goods in non-US dollar based economies). There’s no law of economics that says inflation must affect all goods equally.
“Inflation is here, we just don’t see it in (American) consumer prices yet.” And are we seeing it in the consumer prices of any other major nations yet? Uh, no.
Sorry, if there are no increases in consumer prices, there is no inflation. It is only in your mind.
You are more fundamentally off. Money supply has not exploded since 2008. Have you actually looked at any numbers or are you just repeating drivel you hear on some half-baked media outlet? What has “exploded” is the Fed balance sheet, that is high-powered reserves. But this has not resulted in that much of an increase in the money supply. So, it is not velocity that has dropped, it is the money multiplier. The financial system is severely damaged, and when it finally gets sufficiently undamaged that those reserves start generating an increase in the money supply, there will be plenty of time to reverse gears and lower it, which should not be too difficult then as that will mean that the economy is doing much better.
Barkley’s apparently off the drugs that suppress his AIDS-dementia right now.
11 are we?
Old enough to wipe my own ass, certainly.
Did you live through the time when the Fed ‘reversed gears and lower(ed) it’?
I find the notion that pushing on this lever and turning that valve is an apt comparison to the economy and the Central banker’s notions of their ability to control it somewhat puzzling. So far no one has had a blooming clue what was going on and have done the right thing at any moment purely due to luck and a very large and wealthy cheering section.
A 2012 US dollar buys what 13 cents did in 1960. Are you saying that this phenomenon has come to a halt? Or that the US hasn’t had any inflation for perhaps the last three weeks?
http://research.stlouisfed.org/fred2/graph/?s%5B1%5D%5Bid%5D=AMBNS
So I suppose you consider the St. Louis fed to be a “half-baked media outlet.”
There’s no way to set date range using GET data, so on it, set the starting date range to 2000 and go to the latest end date. The Adjusted monetary base went from about $500 billion to $850 billion from 2000 till the regime breaks in mid 2008. It then goes from $850 to $2,700 billion from the regime break till today. Adjusted monetary base has risen by a greater percent in the less than 4 years between 2008 to today (the loose QE era) than it did in the preceding 28 years from 1980 to 2008 (the tight Volcker era).
Don’t feel bad, he apparently has similar views of the Congressional Research Service and the GAO.
I was considering these same numbers the other day, thanks for the additional source, I had been using this: http://en.wikipedia.org/wiki/Fed#Balance_sheet
A lot of people are surprised to learn we’ve more than tripled Fed holdings. I had also forgotten about the MBS purchases.
I am not sure how 1 and 2 are actually different.
Well 1 (the savings glut) could exist in a world of very low inflation. Say there was an ultra-hard monetary system where no units could be created or destroyed, essentially guaranteeing zero or negative long run inflation (assuming GDP doesn’t collapse).
Say this world has a demographic overhang where a lot of currently working people are going to retire soon and are at or near peak earning power. Consumption smoothing would dictate that most of the population would be net savers. However there are only so many investment opportunities, and the investment possibility is at least somewhat driven by exogenous factors, like technological opportunities. If said society has been suffering through a “great stagnation” over the recent past, there simply may not be that many investable opportunities. Combine with the fact that the reliability and lifespan of capital assets having recently gone up means that there isn’t even that much investment to re-stock depreciated assets.
The high demand for savings and the low supply of investment means that the two will clear at a low rate of (real) return. This could happen even in a low or no inflation environment.
I agree with your analysis, but I will also note that it large identical to 2 (asset inflation) for all practical intents and purposes.
Interesting point. I hadn’t thought about that.
As irrational as it may be, I would rather not give $200B directly to Spain, even at the risk of another Great Depression. If another Great Depression actually occurred because of what’s happening in Europe, and its effects were felt here in the US, then we could spend the $200B here, on safety net expenditures and whatnot.
How about the Fed prints $200B, deposits them into savings accounts at Spainish banks. The EU Central Bank prints 200 Euros and does the same. The banks agree to pay interest equal to whatever the current Treasury rates are. The banks then will either loan out the money to people and businesses at a higher rate of interest thereby generating profits in the long term for themselves and spur spending in the short term for everyone else….or the banks will ‘play it safe’ and just buy Treasuries to pay the interest on their new deposits….in which case the gov’t's borrowing costs goes down.
“send $200 billion directly to Spain and its banks”
Over my dead body.
The government orders the Fed to increase the money supply, and is obeyed.
The government orders the creators of new wealth to fund the Fed, and meets resistance.
I wonder why that is ? and why so little is being done to increase the wealth supply ?
How about Spain and Portugal leave the Euro together and print their own QE. They can keep the “Euro NAFTA” rules on no-tariffs, and freedom of labor and goods.
Send $200 billion to Spain or almost any other EU country and you will have postponed for a very short period what needs to be done. Are you really serious that they just need a little more cash(crack) to kick the spending habit!!! Haha! thats how the politicians got elected in the first place.
Barkley Rosser is the intellectual equivalent of a Cleveland Steamer:
http://www.urbandictionary.com/define.php?term=cleveland+steamer
Refute his argument, or at least try. Name calling, that includes the word intellectual in it, is a nonsense.
If Europe, especially France, scrapped their own farm subsidies they wouldn’t need anybody to rescue them.
And I’m far from convinced we’re in a position to do any rescuing. I predict that the fall of the dollar will lag the fall of the Euro by less than a year.
Dear Mr. Wolf,
I make $20,000/yr, spend $40,000/yr, have $100,000 in high interest debt, and my credit rating is crap. Please loan me $10,000 right away to get the bill collectors off my back. Borrow it if you have to, I don’t care. Just don’t expect me to repay you any time soon. In fact, I’ll probably need another loan in a few months. Those thugs are threating to take away my jet ski, iPad, big-screen TV, and BMW!
This may sound rude, but I’m only asking you to do for me what you expect Germany to do for Spain and Greece.
Well, Spain and Greece bought the jet skis, TVs, and BMWs FROM Germany. Kept that economy humming. If the Germans want to pull the plug they have that right, but I’m not sure they’ll like the blowback.
In other words, loaning (i.e. giving) money to Spain is an indirect, and inefficient, subsidy for German manufacturers. The German government could achieve the same effect for a fraction of the cost by buying every shipload of cargo that would have gone to Spain, and dumping it in the North Sea.
When German banks are seen as shaky, we are at the beginning of another depression and quite possibly the end of the Euro.
Depression? Not convinced. Global recession, heck yes.
The Euro didn’t exist until 1999 and the world somehow functioned without it.
I get the last word: I decided not to go to Greece after all to withdraw my Greek bank money in euros and transfer it to Switzerland before the June 17 elections. Reason: anti-EU Greek party Syriza is talking how they want to stay in the Euro zone (for now) so I have time until the music stops. But then Spain blows up! LOL. Same thing will happen–this will drag out for a few years before it all blows up again. It’s of no consequence to the USA or Japan as both the US and Japan get less than 20% of their GDP from any kind of foreign trading. A media event only and of interest only to countries like Belgium or Spain or Greece or perhaps the Eurozone. Carry on.
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